Many homeowners may find that they want to change certain aspects of their mortgage, such as the loan term or the type of rates they currently have. Fortunately, most are able to replace their current loan with a new one through refinancing. One type that you may have heard off (if you’ve done your research on these types of mortgage deals) is cash out refinance – but do you know how it could benefit you?
With rates predicted to remain near historically low figures, it’s not hard to see why refinancing has become so popular in the U.S – but is it right for you?
Generally, by replacing your old home loan with a new one, you’ll be able to negotiate a lower interest rate, lower the cost of your monthly payments, change the type of loan you have, and more. Both rate and term refinancing (the most basic form of debt replacement) and cash out options tend to offer these benefits – so in most cases, it’s up to you to decide which type is best for you and your current situation.
What is cash out refinance?
Rate and term refinancing usually allows an individual to adjust their mortgage in a number of ways, and while cash out deals aren’t usually too dissimilar, they can often come with a few other benefits and disadvantages.
Generally, this form of mortgage refinance is where a new home loan is for a greater sum than the original, to convert a property’s equity into cash. With these types of loans, you’re likely to get the difference between the old and new mortgage in cash – which can be beneficial in a number of ways. Often, your lender will set a limit on how much you can take out with a cash out refinance – based on the loan-to-value ratio.
On the other hand, these kinds of refinancing options will often come with a higher interest rate than a rate and term loan.
Types of cash out rates
In most cases with this kind of refinance option, you’ll be able to get an FHA (Federal Housing Administration) with either a 15 or 30 year fixed rate mortgage, or as an adjustable one. While rate and term loans tend to offer more options, the ones available to cash out refinancing are some of the most common. As a result, you may find that you could get the type of loan rates you wanted, along with a cash payout, by choosing a cash out home loan.
Is cash out refinance right for you?
If you’re hoping to replace your existing home loan for the lowest interest rates and monthly payments possible, choosing a more basic refinance option may be better suited to your needs. On the other hand, if you’re more interested in adjusting your loan in other ways (e.g. the duration of your loan, or the type of rates you have) and would rather get a lump sum that could be put to better use, cash out refinancing might just be a better option.
Guidelines and requirements of cash out refinance
Unfortunately, not everyone qualifies for cash out refinancing – which is why finding out what you need can often be crucial to ensure that you don’t waste any time or money on applying if you don’t fit the requirements. A few of the usual things you’ll need include:
- At least a 75% LTV (loan to value) ratio
- No late payments within the last 6 months
- A credit score of 600 or higher – although this can sometimes depend on the lender
- A maximum debt to income ratio of 41%
- At most, 1 late last payment in the last 12 months
As these types of refinancing options tend to be stricter than rate and term loans, many of those who don’t qualify for cash out arrangements could still benefit from refinancing with a simpler alternative.